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Investing Shouldn't Feel Like a Trip to Vegas

Don't put your savings on the line trying to guess what the herd will do next, as we saw with GameStop this week.

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As someone who specializes in consumer and market psychology, watching the GameStop (GME) "microbubble" in real time is fascinating. What's so interesting to me is that the short squeeze that Twitter and Reddit groups have orchestrated is an example of when the value of a stock changes (temporarily) for reasons that are unrelated to the fundamental value of the company. So we're, in a sense, able to watch the pure effect of human psychology on the market value of real assets. It's fascinating and fun to watch.

But what's happening here? Put simply, a group of investors got organized and found a few companies whose price they could manipulate if they acted en masse to create a microbubble, if you will. Playing the game of price arbitrage is, in this context, both legal and fun, but it is also based largely on speculation about human behavior, not underlying value. Wise investors will see it for what it is: a temporary price adjustment based on nonfundamental factors. Some people like to keep a small portion of their money in brokerage accounts for exactly this kind of speculative event, but just like you wouldn't take your rent money to Las Vegas, don't put your life savings on the line trying to guess what the herd will do next. In other words, play safe. If you can't afford to be wrong, don't make the bet.

Sarah Newcomb does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.